CoreWeave Might Have Saved the AI Trade but is it an Investment?
The future looks bright and it might not be allowed to fail.
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As mentioned in Wednesday morning’s Market Recon column, Tuesday night’s CoreWeave (CRWV) earnings may have been just what the doctor orders for the AI trade.
For the firm’s fiscal second quarter, which ended June 30, CoreWeave posted a GAAP EPS of -$1.14 on revenue of $2.58 billion. These top- and bottom-line numbers both beat the street’s expectations, while that sales print was good for year over year growth of 113.2%.
On the quarter, co-founder, chairman and CEO Michael Intrator wrote:
“CoreWeave reached an important inflection point this quarter as our scale began to translate into expanding operating leverage. Customer demand is accelerating, as enterprise adoption broadens and we continue to deepen our technology platform. CoreWeave is built on the conviction that AI is foundational to every industry and that realizing its full potential requires a purpose-built platform. This quarter reinforced that conviction.”
Operations
As revenue generation increased 113.2%, total costs and operating expenses 119.9% to $2.624 billion. That left a GAAP operating income/loss of -$49 million, down from $19 million. That took the firm’s operating margin from 2% down to -2%. After accounting for interest, other income and expenses and taxes, the firm’s GAAP net income/loss printed at -$626 million. This works out to -$1.14 per fully diluted share, down from -$0.60 for the year-ago comp.
Once adjusting, primarily for depreciation, amortization and interest expense, operating income printed at $128 million, down from $200 million. That took the firm’s adjusted operating margin down to 5% from 16% and the firm’s adjusted EPS down to -$1.03 from -$0.27. So, why are the shares trading significantly higher on Wednesday morning? It was in the guidance.
Guidance
Not only does the firm now boast an order backlog of $104 billion, not only did CoreWeave ink more than $25 billion in new commitments during the quarter reported, but for the current quarter, as provided during the call, the firm is guiding revenue towards a range spanning from $3.45 billion to $3.6 billion. That takes the low end of the range above the $3.42 billion that Wall Street had been hoping for. Additionally, at the midpoint would be good for annual growth of 159%. The firm also sees Q3 adjusted operating income of $200 million to $260 million as margin continues to sequentially expand and reaches the low teens (in percentage terms) in Q4.
Fundamentals
For the period reported, CoreWeave did generate operating cash flow of $679 million (up from -$251 million). Out of that number came capex spending of $6.422 billion, leaving “free” cash flow of -$5.743 billion, down from -$2.704 billion. The firm obviously does not return cash to shareholders.
Looking over the balance sheet, CoreWeave ended the period with a cash position of $6.397 billion and current assets of $9.52 billion. Current liabilities add up to $20.917 billion, including shorter-term debt of $7.513 billion and deferred revenue of $2.686 billion. This is shaky as could be in my opinion as almost 83% of that short-term debt is labeled as recourse debt. Adjusting for the deferred revenue only brings the firm’s current ratio up to 0.52, which is far from acceptable in anyone’s book.
Total assets amount to $77.07 billion of which very little is labeled as intangible. Total liabilities less equity comes to $72.046 billion. This includes another $27.555 billion in longer-term debt of which 91.3% is considered to be recourse debt. There is at least another $7.006 billion here in non-current deferred revenues. Is this an absolutely awful balance sheet? Kind of. The debt is overwhelming but is largely collateralized.
The firm is depending on lenders like Nvidia (NVDA) and customers like OpenAI to provide future order flow (the backlog). So, is the balance sheet awful? Not unless those companies start having trouble generating the cash flows they need. That said, you can call this balance sheet “aggressive” or “highly leveraged” and you would not be wrong.
Opinion
Up 18% on the day, I don’t know about this one. The future looks bright in terms of sales. The balance sheet is messy, and cash flows are upside down. The firm’s greatest asset may be that the big kids can’t allow them to fail.
CRWV is coming out of a triple-bottom pattern of bullish reversal which, in theory, would have a lot like a double top. In essence, this is a double top that failed and got another chance. The pivot here is the $138 apex in between Bottom 2 and Bottom 3. That’s far enough away to call it a target price in my book and not a pivot.
Both relative strength and the daily MACD are now set up quite bullishly, and this has been exacerbated by Wednesday morning’s pop. While I see these financial results as something of an “all clear” signal for the AI trade, I would prefer to avoid stocks with statements of income, statements of cash flows and balance sheets that look like this. Trade it, don’t own it.
At the time of publication, Guilfoyle was long NVDA equity.
